A new frontier for global finance – C. P. Chandrasekhar

From The Frontline (India’s National Magazine): Foreign investors are understandably showing an increasing interest in Chinese banks. But it is not clear why the Chinese government is courting the dangers associated with their entry.

Until recently, China’s banks were described in terms that made them global outcasts. They were not seen as banks that mobilised savings for investment, but agencies for channelling state subsidies (named loans) to state-owned enterprises with soft budget constraints. They were perceived as being burdened with huge non-performing assets, which were a legacy of their position as an instrument of the state, rather than commercial ventures. And they were considered to be corruption-ridden. Unless they were restructured and recapitalised with substantial infusion of funds, their closure was considered a serious possibility.

Such assessments were particularly disturbing because the `big four’ – Agricultural Bank of China, Bank of China, China Construction Bank, and Industrial and Commercial Bank of China, which are wholly state-owned – dominated the banking sector, accounting for an overwhelming share of assets. Failure of any of them could have devastating consequences for the financial sector as a whole. But failure, most observers agreed, was a remote possibility, given the strength and control exerted by the Chinese government. What seemed more likely is that foreign players, who were to be provided a greater foothold in the Chinese banking market as part of the conditions for China’s access to the World Trade Organisation (WTO), which require a complete opening up of the banking sector to foreign firms by 2006, were seen as unlikely to be interested in acquiring a stake in these banks even if offered a deal.